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Although there has been some movement away from hourly billing of substantive legal services in the last 12 months, clients still by and large continue to treat the billable hour as a unit of work, including in their legal services outsourcing relationships.  The “evils” of hourly billing have been thoroughly discussed elsewhere and the aim is not to repeat them here. 

We are advocates of fixed fees, but accept that, while the false comfort of the billable hour may have been repeatedly lambasted, many clients are yet to find any real comfort in fixed fees either.  We feel that some of this extends from the current concept of ‘fixed fees’ really being little different from hourly billing – in many cases the hours are simply ‘capped’ by the provider.  This does little to reduce actual legal spend or to provide certainty of spend (i.e. where a client knows exactly what they are to get and how much it will cost them).

For fixed fees to offer solid savings and certainty of spend, they need to be formulated differently.  True fixed fees should be scope-based and driven by a business need or problem rather than time, and that scope should be a shared responsibility of the provider and the client.

A Tick for Hourly Billing

It is worth quickly looking at the real positives (there are some!) of hourly billing to understand some of the characteristics fixed fees should have if clients, who wish to move from hourly billing to fixed fees, are to get some comfort about the transition:

• The billable hour gets its credibility from conventional use, and from being an ‘empirical’ measure…the hours worked have been historically observed, recorded and are certain.   Once the hours’ work is complete, a client usually feels they have received something of worth – the hours work has happened and is now an ‘actual’;
• Clients also normally have extensive experience of what output they can expect from a billable hour – it’s not prescribed anywhere of course, but they tend to know what a good hours’ work smells like (even if that hour is not correctly focused on the problem or business need at hand, clients can still tell whether that mis-spent hour is good quality); 
• As the old adage about certainty tells us, “a bird in the hand is worth two in the bush”.  A client can feel comfortable being charged for the historical and empirically recorded hourly unit because its perceived value (benchmarked against experience) is “in the hand” already.

Plan vs. Actual

By agreeing a fixed fee upfront, however, clients can feel they are making a kind of bet on a future outcome where the unit of benefit is not absolutely certain.  The inputs to generating a fixed fee are normally collected upfront, and most inputs are estimates or intangibles (e.g.: “risk”) based on brief conversations between client and provider, and with little reference to actuals.  At the time the fixed fee is quoted upfront the output has not been produced (i.e. it feels like the two birds are still lodged firmly in the bush).  The client doesn’t feel intuitively comfortable with the fixed fee quotation because they know that they themselves haven’t seen all the information needed to make a reliable estimate, and the provider hasn’t tried to elicit it from them either.

Furthermore, many clients feel that legal services providers are not very good at estimates and are likely to charge an inflated fixed fee for the desired result.  Ironically, this perception is largely based on negative experiences with hourly billing, where conservative upfront projections by providers are followed by inflated actual hours charged at the end of the project. Providers traditionally explain these (often significant) differences between ‘plan’ and actual by pointing to swathes of work not identified by either party at the outset (which suggests a poor ‘plan’).

When it comes to advocating fixed fees, why should clients feel providers all of a sudden have the discipline of estimation down pat?  Understandably, clients may feel that legal services providers have the wrong drivers and no checks and balances in the formulation of their upfront fixed fee.

Bridging the ‘Comfort Gap’ Between Billable Hours and Fixed Fees

Before fixed fees are positively adopted, clients need to:

• feel something similar to the perceived certainty of outcome offered by the post factum billed hour, and get that near-certainty upfront…before the work has been done;
• be able to measure the value for money of future outputs in a different (but no less convincing) way because they can’t rely entirely on an hourly smell test any longer;
• know that checks and balances are in place to ensure the result is achieved at significantly less cost than if the work were billed by the hour.

The short answer to bridging the ‘comfort gap’ is to integrate fixed fee billing with project management principles around scoping.  To paraphrase Kettering  – a problem well-defined is a problem mostly solved.  The same can be said for legal projects – an objective well defined is achievable in a reasonable time at a reasonable price and to an expected standard.  Scoping and subsequent governance to that scope can deliver:

• Greater certainty of outcome – a clear definition and scope ‘solves’ most of the problem upfront;
• A granular breakdown of the legal project or task so that all work is focused on a well-articulated business need or problem rather than performing good quality work on ancillary issues  – this alone can reduce the effort required (and therefore the cost) dramatically;
• A project specific set of objectives against which performance can be measured;
• Enhanced understanding of the coverage of the task leaving fewer unknowns and assumptions and therefore less chance of inaccuracy in pricing.

In the coming weeks, we will expand on how the discipline of scoping can deliver these advantages and positively compliment fixed fee billing.